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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis. All posts prior to September, 2007 are in the public domain, but after September 4, 2007, only subscribers to The Analyst's Accounting Observer will see all posts going forward. Only selected, occasional posts will be released to the public domain from September 4 forward.
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| Ford Joins The Derivatives Do-Over Crowd
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Location: Blogs AAO Weblog (Public) |
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| Posted by: Jack Ciesielski |
10/26/2006 6:38 AM |
Old news now, but worth a mention anyway: Ford announced on Monday that it would be restating its financials from 2003 to 2005 in an amended 2005 10-K (and the "selected financial data" therein, from 2001 to 2005) for incorrect accounting related to derivatives. Per the 8-K filing:
"During the preparation of its response to a comment letter from the Division of Corporation Finance of the Securities and Exchange Commission a routine review of its Annual Report on Form 10-K for the year ended December 31, 2005, our indirect wholly-owned subsidiary, Ford Motor Credit Company ("Ford Credit"), became aware of a matter related to accounting for interest rate swaps under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended ("SFAS 133"). Specifically, Ford Credit discovered that certain interest rate swaps it had entered into to hedge the interest rate risk inherent in certain long-term fixed rate debt were accounted for incorrectly because they did not satisfy the technical accounting rules under SFAS 133 to qualify for exemption from the more strict effectiveness testing requirements. PricewaterhouseCoopers LLP, our independent registered public accounting firm, audited our 2001 through 2005 financial statements, which included a review of these swaps.
These interest rate swaps were entered into as part of Ford Credit's asset-liability management strategy. As noted above, the swaps economically hedge the interest rate risk associated with long-term debt issuances, and we continue to believe that these swaps have been and will continue to be highly effective economic hedges. The correction to the accounting does not impact the economics of the hedges, nor does it affect cash."
A few things: first, the fact that Ford had a "routine review" by the SEC infers nothing special. Companies of Ford's size are frequently reviewed by the SEC as a matter of course. Second, while they "became aware of a matter" in responding to the SEC's comment letter on the 2005 financials (filed March 1, so it had to occur sometime afterwards), it's hard to believe they couldn't have been aware of the matter beforehand - companies had been filing restatements for derivatives do-overs as far back as May 2005, like General Electric did, and there was plethora of such restatements in the late fall of 2005. Third, it sounds like the company tried for shortcut effectiveness testing without meeting the "technical requirements" - which are pretty prescriptive, and they're still requirements, whether derided as "technical" or not. Because they went the shortcut route, they couldn't have had contemporaneous documentation to justify the hedge effectiveness once denied the shortcut treatment. Fourth, it sounds like they're saying "it was our auditors fault." Actually, it sounds like both parties missed it.
Is there another wave of these restatements coming? Doubtful, even though Farmer Mac went through the process a couple weeks ago. Being a smallish company, Farmer Mac's controls - including a review of such details - might not yet be up to the same speed as the others making the restatements. And Ford's finance and accounting staff, coping with $5.8 billion losses, succession changes at the top, bond rating changes and market share changes, just might have put changing its derivatives accounting near the bottom of its "to do today" list. |
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